The European Central Bank will keep interest rates
unchanged this week, economists forecast in a Reuters poll, but
they cannot agree on the chances of a cut in the next few
months due to a murky economic outlook.
While a large majority said the Governing Council will hold
the main refinancing rate at a record low 0.75% at its Thursday
meeting, there was no consensus over its next move, reflecting
a similar split among policymakers themselves.
A wafer-thin majority - 38 out of 73 analysts polled over the
last few days - said the ECB will remain on hold for the next
three months. The majority shifts to a 25 basis point cut by the
end of June, but by a margin of only one respondent.
There are two schools of thought.
In one are those who point to poor economic data for the
fourth quarter that signal a deepening euro zone recession.
They argue that this warrants another cut, no matter how limited its effect may be as rates are already near zero.
With the sovereign debt crisis festering, there are few signs
of an early turnaround for the euro zone economy, although
business surveys last week suggested the recession may at least
have passed its nadir.
On the other side are those who say ECB President Mario
Draghi has shown no inclination to repeat last July’s rate cut.
Instead he seems to be waiting for the results of the bank’s programme to buy the bonds of troubled euro zone governments
- which has yet even to start.
That means the most likely outcome is that the ECB stays

on the sidelines, at least for now.
“The Council’s divided, the outlook’s uncertain,” said Alan
Clarke, economist at Scotiabank. However, he said policymakers usually reach consensus rapidly once the economic outlook
becomes clearer. “It doesn’t unduly disturb me there’s a split,
because as the euro zone’s demonstrated in the last year or two,
things can change just like that,” he said.
Clarke thinks the ECB is more likely to stay on hold. The
Governing Council is already pessimistic about the economic
outlook, so data would have to worsen yet more for members
to swing behind another rate cut.
The euro zone economy has shrunk for three consecutive
quarters, with GDP down 0.6% year-on-year in June-September
2012. A flash estimate for the fourth quarter is due on February
14.
The Reuters poll was conducted before global regulators
gave banks four more years and greater flexibility to build up
cash buffers so that they can use some of their reserves to help
struggling economies to grow.
SPLITTING IMAGE
Disagreement among the forecasters merely reflects the split
among the ECB’s own policymakers. Board member Yves
Mersch was quoted last month as expressing his opposition to
cutting the refi rate any further, saying he had not heard Draghi
making any departure from the current policy line.
However, Governing Council member Jozef Makuch said

the bank had a “very serious debate” last month about cutting
interest rates.
There was similar debate among survey respondents over
the meaning of Draghi’s comments at the December meeting
that the Council had a wide-ranging discussion on interest
rates.
“The markets over-interpreted the dovish comments by
Mario Draghi in December,” said Lena Komileva from G+
Economics.
She forecast a cut in the second quarter, but added: “While
the ECB’s bias will remain dovish over the next 12 months, the
decision to cut rates again will depend on the will of a small
minority of core euro zone countries rather than the euro zone
majority.”
Others, such as Christian Schulz from Berenberg Bank,
reckon the economy will show enough progress for rates to stay
on hold for the time being. He expects the ECB to raise the refi
back to 1% by the end of the year, which represents the most
hawkish forecast in the poll.
“The recovery should start to gain a little bit more pace
towards the end of the year,” said Schulz, adding that the ECB
would lead the main central banks in tightening policy. “The
ECB will want to reassert inflation-fighting credentials by raising rates first again, as in 2008 and 2011.”
Euro zone inflation held steady at 2.2% in December despite
expectations of a fall, only a little above the ECB’s target ceiling
of 2%.

‘Davos man’ fears more storms, real and economic
l

Income disparity and government debts top risk list; Climate ranks third,
extreme weather a growing concern

Fragile economies and extreme weather have combined to
crank up the global risk dial in the past year, creating an
increasingly dangerous mix, according to the World
Economic Forum.
Despite Europe’s avoidance of a euro break-up in 2012
and the United States stepping back from its fiscal cliff, business leaders and academics fear politicians are failing to
address fundamental problems.
That is the conclusion of the group’s Global Risks 2013
report, which surveyed more than 1,000 experts and industry
bosses and found they were slightly more pessimistic about
the outlook for the decade ahead than a year ago.
“It reflects a loss of confidence in leadership from governments,” said Lee Howell, the WEF managing director responsible for the report.
Severe wealth gaps and unsustainable government
finances were seen as the biggest economic threats facing the
world, as they were last January. There was also a marked
increase in focus on the dangers posed by severe weather.

The 80-page analysis of 50 risks for the next ten years
comes ahead of the WEF’s annual meeting in the Swiss ski
resort of Davos from January 23 to 27, where the rich and
powerful will ponder the planet’s future.
Chief executives arriving on their private jets may still
ooze confidence but “Davos man” - and most delegates are
male - has plenty to worry about these days.
“Most of the risks have gone in the wrong direction in the
past year,” Howell told reporters.
On the economic front, eurozone instability will continue
to shape global prospects in the coming years and the “associated risk of systemic financial failure, although limited,
cannot be completely discarded,” the report said.

SUPERSTORM SANDY

Concerns about rising greenhouse gas emissions have
grown notably in the past 12 months. The issue is ranked as
the third biggest worry overall, while failure to adapt to climate change is viewed as the biggest single environmental

hazard.
Superstorm Sandy, which wreaked havoc on the U.S. east
coast in October, was a wake-up call for many. But it was not
an isolated event in a year that also saw droughts, floods and
the Arctic sea ice melting to a record low level.
Extreme weather was on display again this week as
Australia grappled with fires and heatwave conditions, while
temperatures in China plunged to a 28-year low.
“Two storms - environmental and economic - are on a
collision course,” said John Drzik, chief executive of Oliver
Wyman, a unit of insurance broker Marsh & McLennan.
“If we don’t allocate the resources needed to mitigate the
rising risk from severe weather events, global prosperity for
future generations could be threatened.”
Outside the interlinked areas of the environment and the
economy, the WEF identified other dangers, including
increasing resistance of bacteria to antibiotics and the danger
of “digital wildfires” created by the rapid spread of misinformation online.

French employers say cannot meet union demands
French employers will reject moves to overhaul rigid
labour rules unless unions drop demands for heavier welfare
charges on short-term job contracts, their leader said, suggesting talks this week could fail.
Socialist President Francois Hollande called on employers
and unions to strike a deal by the end of 2012 that would
grant companies more flexibility in hiring and firing while
giving more job security to workers on short-term contracts.
Talks between the Medef employers’ union and main
labour groups spilled over to January after the last round
broke up on December 21 without a deal, with each side
accusing the other of making unacceptable demands.
As talks resume this week, Medef chief Laurence Parisot
said employers would be unable to sign a deal imposing higher costs for hiring on seasonal or short-term contracts.
“The issue of taxation for short contracts is a vital question,” Parisot said on Radio Classique.

The government says it will impose its own deal if the two
sides fail agree. It is pushing for a deal to address concerns
that France has a two-speed labour market, with those on
long-term job contracts enjoying too much job security and
those on short-term contracts too little.
It has also granted French companies 20 bln euros in tax
credits to offset high social security charges for labour, which
is often cited by economists as a brake on growth and an
important factor in maintaining chronically high unemployment.
Unit labour costs in Germany crept up 2% in 1999-2010,
while in France they leapt by more than 20%, OECD figures
show. Productivity gains were pumped back into wage
increases to fuel domestic demand.
French unemployment is at a 13-year high while across
the Rhine joblessness is at 6.9%, below the euro zone average.

Parisot said that heavier levies on short-term contracts,
which are mainly used in tourism and restaurants, would
make employers less not more - likely to hire,
while
undermining
broader efforts to ease
wage pressures.
Employers want an
agreement that will
allow companies to
adjust their wage burden
more nimbly in a downturn, as well as simplifying the rules about firing
workers to make the
process more predictable
and keep costs in check.

FinancialMirror.com

January 9 - 15, 2013

CYPRUS | 3

Banks merger on the table?
l

BOCY, Laiki, HB need to ringfence their “good loans” from the “bad loans” in Greece
and then replicate the same model in Cyprus
“Consolidation” used to be a taboo word, especially when
it came to banks. Yet, with public rescue funds coming in
once the PIMCO and BlackRock reviews are completed, now
may be the best time to talk about mergers in the island’s
banking system.
Already, four of the biggest in Greece – National Bank,
Eurobank, Alpha and Piraeus – have received some 27 bln
euros in bailout money which will help them recapitalize
their operations and resume lending, with a trickle-down
effect expected to partly help the three Cypriot banks that
remain grossly exposed to the Greek market.
Part of the plan being floated around includes ringfencing
the “bad”, non-performing loans of the Cypriot banks in
Greece and handing them over to an asset management
company in exchange for government bond guarantees. This
would allow the banks to focus on their “good” loans and
perhaps consolidate their operations in Greece into one in
order to benefit from economies of scale.
The same model could eventually be replicated in Cyprus,
even though industry analysts say that the small size of the
local economy, and their disproportionate overseas
expansion, would require at least two “large banks” to
continue to operate.
Both Bank of Cyprus and Popular Laiki Bank issued profit
warnings last week, with the former saying that after-tax
results for 2012 and before the impairment of Greek
government bonds (GGBs) will be worse than the full results
for 2011, while the Core Tier 1 ratios may even be below 5%
announced last month. This is below the 6% target set by its
Greek peers.
On the other hand, Laiki said it expects its 2012 results to
show a reduced after-tax loss compared with its record loss in
2011. The bank reported a 2.5 bln euro net loss in 2011 that
forced it to seek a state bailout of 1.79 bln euros. As a result,

the government now controls 84% of the bank.
Both are expected to tap into the lion’s share of 10 bln
euros that all Cypriot banks may need to recapitalise, as part
of a 17.5 bln euro bailout package that Cyprus needs to roll
over its public debt and pay down its runaway public sector
deficit. But the final bill will not be known until Black Rock
audits the due diligence report of PIMCO, the world’s biggest
bond manager.
Laiki has already closed 64 branches in Greece and Cyprus
and offered redundancy packages mainly to its staff in
Greece.
“It is now up to the Central Bank of Cyprus and the
government to decide what they will do next and, hopefully,
they will learn from the Greek experience,” said a senior
banking source.

“BAD BANK”

“In Cyprus, too, the “bad bank” operations would probably
be transferred to a state-controlled asset management
company. With economies of scale being less in Cyprus, the
current banks would probably continue as they are, focusing
on their “good bank” operations, and they will may even
continue with their present staff.”
“It would be better if at least two big banks continued in
Cyprus,” the source told the Financial Mirror, adding that
although it has projected an image of having avoided the crisis,
Hellenic Bank too is exposed heavily to NPLs and other bad
loans in Greece.
Central Bank Governor Paniccos Demetriades seemed
confident when he met Eurozone ambassadors on Monday,
saying that a consolidation in the banking sector is possible,
under the present circumstances.
Acknowledging the harsh criticism from the international
media, Demetriades also plaid down the issue of sustainability

of the Cyprus public debt, telling the diplomats that Cyprus
would not seek the contribution of private depositors,
especially after the failure to secure a 5 bln euro loan from
Russia.
“The postponement of the maturity of the Russian loan
would be acceptable to Eurozone governments, as well as the
privatisation of public companies, while [the Governor] also
seemed in agreement that Cyprus should not have been
imposed a bond haircut,” a diplomat told the Financial Mirror.
A Central Bank source was quoted by the Cyprus News
Agency as saying that “there is no issue of the Cypriot banks
pulling out of Greece,” but that they would need to revise their
strategic plans and decide what kind of operations they would
maintain there.

January 9 - 15, 2013

FinancialMirror.com

4 | CYPRUS

Suppliers bail out Orphanides stores with takeover
l

Most jobs saved, to reopen as New Era Orphanides

Suppliers owed some 85 mln euros by Orphanides
Supermarkets, the one-time darling of the Cyprus stock
market, are expected to take over most of the operations of the
chain and rename it “New Era Orphanides” (NEO) to try to turn
it around and recoup their losses within ten years.
The initial rescue plan foresees a 12-month period where the
suppliers will have full control over the entire business in order
to bring it back to profitability, rehiring a significant part of the
1,500 staff currently in limbo.
In a stock exchange filing, the company, that has been
dropped from the CSE Main Market and placed in the Special
Category, said that a memorandum of cooperation has been
reached between founder and primary shareholder Christos
Orphanides on the one hand, and Georgos Georgiou,
representing most of the suppliers, on the other.
The deal calls for the suspension of all activities of
Orphanides Public Co. and the transfer of “the largest part of its
supermarkets” to the new company controlled by the suppliers
that will rehire staff and buy the stock.
NEO will pay Orphanides Public or the banks at least 2% of
the turnover of each supermarket and 0.1% in royalties and
rights, with Christos Orphanides and his company maintaining
the right to buy back the debt and the entire business any time
after the first year, having already repaid suppliers and the
banks, that are owed about 140 mln euros.
Laiki Popular Bank, that carried most of the Orphanides debt
on its books, had initially objected to the appointment of UKbased Andreas Andronikou as administrator because of his
close ties to Christos Orphanides, and instead urged suppliers

NEO to reopen on 14/1
with 16 stores
New Era Orphanides (NEO), the restructured
entity headed by suppliers, will reopen 16 of the
Orphanides stores by January 14. Most of the stores
are high-traffic outlets and low-cost operations, as is
the case of the Express mini-markets. The NEO
stores are:
NICOSIA: Anthoupolis, Paliometocho, Latsia,
Ayios Pavlos, Sopaz.
FAMAGUSTA: Paralimni.
LARNACA: Central, Dhrosia, Kiti, Skarinou.
LIMASSOL: Commercial
Centre, Zakaki, Petrou &
Pavlou, Yermasoyia,
Kolossi.
PAPHOS: Paphos Mall.
to come up with a rescue deal. Press reports suggest that Laiki
and other banks have given NEO their blessing.
“We are saving thousands of jobs, ensuring the viability of
tens of other companies and providing a new and efficient
model with NEO,” Georgiou said in a statement.
He said that the aim is to restart the supermarkets as soon
as possible, adding that NEO’s profitability is expected to be

satisfactory so as to ensure the repayment of debts well within
the ten-year plan.
Georgiou added that Ernst & Young is working on a new
business plan and that the new venture will be headed by a 7man executive team, four of whom will represent the suppliers.
Also, GRV North, the primary supplier of fruit and veg to all
Orphanides stores that is owed some 400-500,000 euros, is
expected to suspend its Court injunction on the public
company, in order to allow the new venture to operate.
END OF AN ERA
Orphanides Supermarkets accumulated debts of about 235
mln euros after a 26-year journey that saw the founder start
with the flagship store in Larnaca and expand to a chain of
nearly 30 large and small Express outlets around the island.
Having embarked on a drastic cost-cutting plan a year ago
with redundancies and pay cuts, chairman Chris Orphanides
blamed banks in mid-December for the demise of his chain,
saying that lack of liquidity and strict controls by the Central
Bank’s cheque clearing system drained his company of
operating funds.
The company had already shut down 11 stores due to lack
of stock supplies, while Orphanides also accepted responsibility
for “mistakes of the past”.
The company, that embarked on an aggressive expansion
plan in 2007 with the aim of opening smaller Express outlets to
beat low-cost rivals Carrefour and Lidl, claims that its property
assets alone worth 340 mln euros more than cover the debt.

Zero hour for CAIR
VAT up
to 18%
from
Monday
The new year heralded
in a new age of higher
taxes, with none of the
primary candidates for next
months presidential
elections pledging to lower
any of the new levies.
A 7c consumer tax on
fuel (8.2c incl VAT)
brought in millions in fresh
revenue as a shortage scare,
supposedly because of an
industrial dispute, pushed
thousands of motorists to
fill up their tanks in the
wake of a national strike.
Eventually, the strike only
lasted six hours on Friday,
while some petrol station
owners abstained.
Higher taxes have also
been imposed on rolled
tobacco and spirits.
Value added tax (VAT)
will rise by one percentage
point as of Monday, from
17% to 18%, which will rise
a further percentage point
to 19% on January 1, 2014.
Milk is now more
expensive by 4c a litre
wholesale (from 49.7c to
53.7c), with the retail
prices expected to go up on
January 15 by 12c to 1.46
euros a litre.

The three different labour working groups at Cyprus Airways representing
the cabin crew, engineers and administration have received copies of the Air
France Consulting rescue plan to help the troubled national carrier.
Already, 407 employees will be made redundant and the airline is
expected to operate with some 578 staff who have set demands that further
pay cuts be proportional and not across-the-board.
Trade unions are also adamant against privatising the
engineering and maintenance divisions, while talks are
underway to outsource the operations of the IT, Catering
and Loading units.
Ironically, the same trade unions had demanded that
these cuts be imposed on former state-owned Eurocypria,
which had been operating with much lower overheads, in
order to close down the low-cost carrier and ensure the
continuity of the larger flag carrier.
Meanwhile, in a stock market filing, Cyprus Airways
issued a profit warning for the 2012 results, “mainly due to
the continuing financial crisis and the intensifying
competition, especially by low cost carriers that receive
subsidies, a significant increase in the fuel prices and the
weakening of the Euro US Dollar exchange rate.”
The 2011 results included the non-recurring benefit
from the exchange of slots at London Heathrow airport
with Virgin Atlantic Airways, as well as the profit from the
sale of an Airbus A320-200 and three spare engines,
redundancies and the reduction in the value of two A319s

that were disposed of in 2012.
Meanwhile, CySEC has approved the prospectus for the issue of 391 mln
rights with a nominal value of 1c each, at the rate of 1 right for every share.
The rights will start trading on January 18 and will be exercised at 2.88 euros
for every 25 rights that will be converted into 144 fully paid shares.

FinancialMirror.com

January 9 - 15, 2013

CYPRUS | 5

Unemployment hits 14%, yet wages up
CPI-indexation has now been suspended
The Cyprus unemployment rate reached a shocking 14%
in November, according to estimates produced by Eurostat,
joining the other euro area peripherals who recorded a sharp
increase: Spain (26.5%), Greece (26.6%) and Portugal
(16.3%).
In November 2011 the Cyprus unemployment rate was
9.5%.
Only five years ago, Cyprus boasted near full employment
with an unemployment rate of just 3.7%.
Meanwhile, the monthly registered unemployment figure, which count only those registered for unemployment
benefits, breached 40,000, rising by 26.5% to reach 41,625,
compared with 31,826 recorded in December 2011.
The figures by occupational category serve as an advertisement for higher education.
By occupational category, the largest number of unemployed are found among those with elementary occupations
(9,649), followed by service and sale workers (8,259) and
clerks (6,511).
However, there were also 2,418 professionals without

work in December.
But wages keep on rising
Despite the alarming increase in unemployment, wages
have continued to rise, by thanks in large part to the wageindexation known as the cost of living allowance (COLA).
Average earnings rose compared with the year earlier by
1.1% in the third quarter of 2012 to EUR 1,912.
From 2013 one might expect to see a contraction in earnings. As part of the terms of its hoped-for bailout, the government suspended COLA for public-sector workers at the
end of last year.
There is also anecdotal evidence to suggest that the private sector has already stopped implementing wage indexation.
The government also implemented cuts of up to 12.5%
for any public-sector worker earning more than EUR 1,000
per month. Cystat says that these cuts will not affect gross
earnings figures but only net income.
www.sapientaeconomics.com

Business confidence up in December
The business climate in Cyprus in December settled 1.4
units higher m-o-m, according to the Business and
Consumer Survey conducted by the Economic Research
Centre of the University of Cyprus in cooperation with the
European Committee.
Four of the five key sectors saw improvements with
Manufacturing up 1 point, Trade up 4, Construction up 4
and the Services sector up 5 points, with only the Consumer
sector receding 3 points.
“The improvement in the business climate is attributed to
the increase in the majority of the sectors, especially the
services sector owing to the increased demand in 4Q 2012
and favourable estimates for the short-term outlook
demand,” Laiki Bank said in its daily research note.

Industrial output prices rise 7% y/y
in Jan-Nov
Despite a year in which industrial production declined sharply, industrial output prices rose by 7% over the year
earlier in January-November according to Cystat.
In November alone, industrial output prices fell by 0.4% compared to October 2012, while the manufacturing
subindex dropped by 0.1%.
Meanwhile, industrial production fell by 8.8% over the year earlier period in January-October 2012.
In October alone, overall output declined by 6.1% compared with October 2011, while manufacturing dropped by 7.2%.

Monthly earnings start to fall in 3Q
The average gross monthly earnings of employees in the
third quarter of 2012 amounted to 1,912 euros (males 2,081
and females 1,717), according to the preliminary estimations
of the Statistical Service Cystat.
Compared with the second quarter of 2012 (seasonally
adjusted data) there was a marginal decrease of -0.3% (males 0.7% and females 0.1%), while the quarter-on-quarter change
during the third quarter of 2011 was 0.4%.
Year-on-year, the data showed a 1.1% increase from the third quarter of 2011, while the rise from the third quarter of 2010 was 1.9%.

The payment of the automatic Cost of Living Allowance
(COLA) on the gross earnings of employees amounted to
1.70% as from January 2012 and 1.27% as from July 2012.
Starting from January 2012, however, the COLA is not paid to
employees of the broad public sector where the deductions
which were implemented from the last quarter of 2011, do not
affect the gross salary of employees but only their net income.
Consequently, while these deductions reduce the disposable
income of employees, they are not reflected in the fluctuation
of gross earnings and the figures above, Cystat said.

Atlantic pays EAC €103 mln
in compensation
Atlantic Insurance Company Public Ltd. announced that payment for 102.5 mln euros was made to the
Electricity Authority of Cyprus on December 28 as compensation for the restoration of damages at the EAC
plant at Vassiliko.
The insurer said that the total amount of compensation of 132.5 mln from the disastrous explosion at
Evangelos Florakis naval base in Mari on July 11, 2011 have been completed.

Electricity prices rise
highest in 2012
You already knew it from your electricity bills, but the fastest
pace of increase for prices in 2012 was for the category of
housing, water, electricity and gas.
Prices in this category rose by 11.3% in 2012, having already
risen by 10.4% in 2011.
In the second half of 2011, the near-monopoly Electricity
Authority of Cyprus slapped a surcharge on electricity bills to
pay for the major power station that was destroyed.
The only category that saw an actual cut in prices in 2012
was clothing and footwear. These generally low budget items
have been hit by rising unemployment and a squeeze on credit.
Overall inflation in 2012 rose by 2.4%, from 3.3% in 2011.
Overall inflation would have been higher had it not been for
the deflationary effect of imported goods (excluding fuel), which
fell by 0.6%.
Prices of local goods, on the other hand, continued to rise
above average, increasing by 6.7%. High inflation of local
produce suggests that competition in the local market is still
weak. However, this coming year of austerity may see things
change a little.
www.sapientaeconomics.com

Euro zone sentiment rises
for 5th month in row
Euro zone sentiment improved for a fifth consecutive
month in January, with investors’ expectations rising to
their highest level in almost two years after a successful
Greek bond buyback and a dip in Spanish jobless figures.
Research group Sentix said its monthly index tracking
investor sentiment in the 17-nation currency bloc climbed
to -7.0 in January, up from -16.8 in December, coming in
well above a Reuters consensus forecast for an increase to 15.0. “The euro zone index was stronger than expected... and
that was partly due to many rather minor positive reports
from around the region,” Sentix said in a statement.
A buyback of Greek debt hailed as a success, an upgrade
of the recession-mired country by ratings agency Standard
and Poor’s and an unexpected dip in Spanish unemployment in December fed investor optimism, Sentix said.
A smaller-than-expected 2012 budget deficit for Ireland
and Germany’s robust labour market also contributed to the
more positive mood, Sentix said.
A sub-index of expectations rose to 12.0 in January from
-1.5 in December, its highest level since February 2011. A
sub-index tracking current conditions rose to -24.3 in
January from -31.0 in December.
An index for investor sentiment in the United States rose
by 2.9 points to 10.0. “Investors are relieved that the country avoided falling over the fiscal cliff but they are disappointed about how the American tax compromise came about and
about the compromise itself,” Sentix said.
An index tracking global investor sentiment rose by 5.6
points on the month to 14.1 in January, its highest level
since August 2011.
“Happy New Year - the recovery is underway,” Sentix
said.

FinancialMirror.com

January 9 - 15, 2013

6 | OPINION

Shacolas plan must be taken seriously
EDITORIAL
One of the best parting gifts that Labour Minister
Sotiroula Charalambous could give to the nation would
be to adopt entrepreneur Nicos Shacolas’ advice to
allow for shops to operate seven days a week, a plan
that the successful businessman has pledged will generate “several hundred” jobs in his retail empire alone.
He should know better. With nearly 1,100 fulltimers and part-timers already employed at the
Debenhams chain and other retail stores, one of the
few commercial enterprises that keep on recording
increased sales (and paying dividends to shareholders), the NK Shacolas and Hermes Groups want to hire

more people, preferably unemployed, to work Sunday
shifts or to replace permanent staff seeking a day or
two off.
The veteran businessman believes that this move
would cost the state nothing and would generate several thousand new jobs within all retail operators. This
would also help reduce the burden on the benefits paid
out to unemployed people, while contributions to the
near-bankrupt Social Insurance Fund would also benefit from the earnings of new workers.
Shacolas proposes that this plan initially be adopted
for a year, while it would not be imposed on anybody.
Store owners would be free to open and close whenever
they want, depending on the flow of business, while
longer working hours would also help support the
tourism industry, that expects higher arrivals this year.

Slow GDP growth has meant slow employment
growth and reinvigorating the retail sector would partly allow growth to resume.
The only obstacle, which the Labour Minister is
using as a pretext to do nothing on the issue, is the
club of the small shopkeepers, POVEK, who fear that
larger chains and supermarkets are robbing them of
their business.
Perhaps, POVEK members have not yet realized that
large corporations are also rigid and do not have the
flexibility of a mom-and-pop shop where one can
change prices in a store window before you can finish
your metrio.
Longer hours are good for us all. Especially at times
of high unemployment and a lot of frustrated people
saying they cannot find jobs.

Life insurers need to prepare for
future changes, says PwC
A new PwC report, “Life Insurance 2020: Competing for a
future”, says that emerging markets (South America, Africa,
Asia and the Middle East - SAAAME) are seeing rising
demand for insurance products as their economies expand
and their consumers acquire more wealth to protect.
Almost 50% of insurance industry leaders see emerging
markets as more important than developed markets to their
company’s future. Life insurance is a shrinking market in
some countries like US, while pensions and retirement
income is a growing sector for developed nations and China
due to the changing demographics. Demand for pension
products in emerging markets is likely to catch up with the
West as health improves and consumers live longer.
Life insurers are likely to make significant changes to their
business models over the next ten years. The cap on financial
advisers’ fees in many countries, including India, and
planned elimination of commission for advisers in the UK
will bring the value policyholders receive from these charges
further into the spotlight. Further, technology will have an
increasing influence over the purchase of insurance.
“The old adage that insurance is sold, not bought is being
challenged. As customers use the internet and their own
social networks to gain knowledge about the kinds of
products they need and use technology to determine the
affordability and worth of insurance products, life insurers
will need to adapt accordingly,” said Androulla Pittas, Partner
in Assurance Services and Insurance Responsible Partner at
PwC Cyprus.
“The growth agenda is being shaped by the very different
economic prospects and demographic profiles of emerging

and developed markets. As urbanisation and longevity are
increasing in emerging countries at a faster rate than in
developed economies, there is enormous potential for life
insurance businesses to grow in these markets.
“Effective use of technology is going to be a crucial factor.

Consumers have become accustomed to the ease, intuition
and elegance of digital retail interaction and want the same
experience from life insurers. As smartphones and other
mobile devices proliferate, customers will increasingly
demand to be able to buy what, when and where they want.”

App acts as PA for busy digital life
Looking for a reliable assistant for your complex
digital life? A new app that can detect tasks and help
users to complete them could be the answer.
Easilydo, which is available in English for iPhone
and iPod Touch in 46 countries, aims to be a pervasive
assistant that uncovers tasks from email, calendars,
social network and address books.
Tasks it helps to tackle include sending a birthday
greeting through Facebook, tracking shipments, or
adding contacts to an address book. Twenty four tasks
can be detected and are cued up visually within the
app.
“We’re focusing on the consumer with recognition
that most consumers, especially those with high-end
smartphones also have professional tasks that they
want to get done,” said Mikael Berner, the CEO of SanFrancisco-based company Easilydo.
According to Berner, the app is useful for knocking
off tasks in batches, and also for getting assistance
with impending chores.
If there’s an upcoming conference call, the app will dial
into the number. If there’s an in-person meeting, it will
remind the user when it’s time to leave, and even provide a
map to get there.
The app is also constantly on the lookout for news from
social networks using language processing technology that
can detect, for example, when someone buys a new home or
gets engaged, so that a greeting or gift can be sent using the
app.
“Every person has to make roughly 35,000 decisions a
day, and the more decisions you have to make, the more
worn out you are at the end of the day,” said Berner, adding

No part of the Financial Mirror
newspaper, the Greek-language XÚ‹Ì·
& AÁÔÚ¿, the daily XpressOIKONOMIKH electronic PDF edition or

that only about 5% of those decision are conscious.
Another problem the app aims to ease is context switching, being diverted from one task to another before eventually returning to complete it.
According to Berner, the average office worker switches
tasks every three minutes and doesn’t return to a particular
task until 22 minutes later.
The company plans to add new tasks monthly and to create a way for users to create custom tasks. It also plans to
release an Android app and hopes to work with businesses
such as banks or airlines to help their customers with tasks
such as paying bills, checking into airlines or booking flights.
Similar apps include Google Now for Android, and Cue for
iPhone.

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or agencies.

On 13 July 2010, the second Directive on VAT invoicing
(2010/45/EU) was adopted and its provisions are applicable
by Member States (MS) as from 1 January 2013.
The new Directive aims at: promoting and further
simplifying invoicing rules; establishing equal treatment
between paper and electronic invoices; promoting the use of
e-invoicing; and, combating VAT fraud.

PRACTICAL IMPLICATIONS ON BUSINESSES
The new Directive deals, amongst others, with the use of
simplified and electronic invoices, the storage of invoices, the
time of supply for certain types of transactions and provides
for an optional cash accounting scheme in certain
circumstances.
The changes are likely to affect businesses operating both
locally and internationally. Those affected should identify the
changes that need to be made in their accounting and
reporting systems and amend their procedures where
necessary, in order to comply with the new requirements in
a timely manner.
As an example, businesses will need to establish and
document business controls that create an audit trail
between the invoice and the supply (e.g. matching of invoice
with purchase order, settlement of invoice etc). Another
example on how the provisions of the new Directive will
affect businesses is that IT setups will need to be revisited to
ensure that e-invoices are safely stored throughout the
mandatory storage period in the original form in which they
were sent.
As at the time of writing, Cyprus has not enacted any
provisions of the new Directive into law.

MAIN CHANGES
Goods transferred from one MS to another for valuation
and return (Article 17 (2) (f) replaced)
The dispatch of goods from one MS to another, for
valuation or work upon, and the subsequent transfer to the
MS from which they were initially dispatched, will not be
regarded as supply of goods for VAT purposes.
In addition, a register of the goods dispatched to another
MS should be kept, with sufficient detail to enable the
identification of such goods (Article 243 replaced).
Continuous supplies of goods (Article 64 (2) replaced)
Continuous supplies of goods for a period of more than
one month, transported from one MS to another, will be
regarded as being completed on expiry of each calendar
month until the supply comes to an end.
Continuous supplies of services for which VAT is payable
by the customer over a period of more than one year (and
which do not give rise to statements of account or payments
during that period) will be regarded as being completed on
expiry of each calendar year until the supply of services
comes to an end.
Deadline for issuing invoices (Article 222 replaced)
The deadline for issuing invoices for supplies of services
where VAT is payable by the customer (i.e. through reverse
charge mechanism); and, supplies of goods dispatched from
one MS to another (i.e. Intra-Community supplies of goods),
will be the 15th day of the month following that in which
goods or services are supplied.
For other supplies of goods and services, MS are allowed
to impose different time limits.

Translation of invoices in foreign currencies
to EURO (Article 91 (2) replaced)
MS shall accept the use of the exchange rate published by
the European Central Bank at the time the VAT becomes
chargeable. MS may require to be notified of the exercise of
this option by the taxable person.
However, for some transactions, MS may use the
exchange rate governing the calculation of the value for
customs purposes (i.e. the Customs & Excise exchange
rates).
Translation and language used on invoices
(new Article 248 (a) inserted)
MS may, for certain taxable persons or certain cases,
require translation of invoices into their official languages.
However, MS may not impose a general requirement that
invoices be translated.
Currency denomination of invoice (Article 230 replaced)
The amounts on the invoice may be expressed in any
currency, but the VAT payable will need to be adjusted and
expressed in the national currency of the MS, using the
mechanism described above.
Amendments on the contents of the
invoices (Amendment of Article 226)
In specific cases, the following details need to be stated on
the invoices as follows:
Case:
Cash accounting scheme is used
Self billing is used
VAT is due by the person to
whom the goods or services
are supplied

Invoicing rules (new Article 219 (a) inserted)
Invoicing shall be subject to the rules of the MS in which
the supply of goods or services is deemed to be made.
However, invoicing shall be subject to the rules of the MS
in which the supplier has established his business (or has a
fixed establishment) in the case where:
* there is an Intra-Community supply of goods or services
and the person liable for the payment of the VAT is the one
to whom the goods or services are supplied (i.e. through
reverse charge mechanism), except in the case of self-billing;
* the supply of goods or services is deemed to take place
outside the EU.
Simplified invoices - obligation
(new Article 220 (a) inserted)
MSs shall allow taxable persons to issue simplified
invoices in the cases when the amount of the invoice is not
higher than EUR 100; and, when a document or message
(i.e. debit or credit notes) amends the initial invoice.
Simplified invoices will not be allowed for exempt intracommunity supply of goods, distance sales and in cases
where the person liable for the payment of VAT is the one to
whom the goods or services are supplied.
Simplified invoices - optional
(Amendment of Article 238)
MS may provide that simplified invoices are issued in the

cases where the amount of the invoice is higher than EUR
100 but less than EUR 400; and, commercial or
administrative practice makes it particularly difficult for
issuing a full VAT invoice.
Simplified invoices will not be allowed for exempt intracommunity supply of goods, distance sales and in cases
where the person liable for the payment of VAT is the one to
whom the goods or services are supplied.
Details on simplified invoices
(new Article 226 (b) inserted and Article 223 replaced)
Simplified invoices should include :
* the date of issue;
* identification of the taxable person supplying the goods
or services;
* identification of the type of goods or services supplied;
* the VAT amount payable or the information needed to
calculate it;
where the invoice issued is a document or message
treated as an invoice, specific and unambiguous reference to
that initial invoice and the specific details which are being
amended (i.e. applicable for debit and credit notes).*
MS shall allow the issue of summary invoices which detail
several separate supplies of goods or services, provided that
VAT on the supplies mentioned in the summary invoice
becomes chargeable during the same calendar month.
Definition of e-invoice (Article 217 replaced)
An “electronic invoice” is an invoice which is issued and
received in any electronic format.
Acceptance of e-invoice (Article 232 replaced)
The e-invoice shall be subject to acceptance by the recipient.
Authenticity, integrity and legibility of an
invoice (Amendment of Article 233)
The authenticity of the origin, the integrity of the content
and the legibility of an invoice, whether on paper or in electronic form, shall be ensured from the time of issue until the
end of the period for storage of the invoice.
Each taxable person will need to determine the way to
ensure the authenticity, integrity and legibility of the invoice.
This may be achieved by business controls which create a
reliable audit trail between an invoice and a supply of goods
or services. Examples that ensure the authenticity and
integrity of an e-invoice include the advanced electronic signature and EDI.
VAT accounting on a cash basis
(new Article 167 (a) inserted)
MS will be allowed, to introduce an optional cash
accounting scheme i.e. for supplies made/received, VAT will
be chargeable/claimable on receipt/payment.
MS which apply the optional scheme, shall set a threshold for taxable persons using the scheme, based on their
annual turnover. That threshold may not be higher than EUR
500,000. MS may increase that threshold up to EUR
2,000,000 or the equivalent in national currency after consulting the VAT Committee.
Storage of invoices (Article 249 replaced)
MS may require that invoices be stored in the original
form in which they were sent, whether paper or electronic.
Additionally, in the case of invoices stored by electronic
means, the MS may require that the data guaranteeing the
authenticity of the origin of the invoices and the integrity of
their content, is also be stored by electronic means.
MS may lay down specific conditions prohibiting or
restricting the storage of invoices in a country with which no
legal instrument exists relating to mutual assistance.
In addition, in the case where invoices are stored by electronic means and the former relate to supplies where VAT is
due in the MS of recipient, that MS shall have the right to
access, download and use those invoices.
www.kda.com.cy

FinancialMirror.com

January 9 - 15, 2013

8 | CΟΜΜΕΝΤ

Alternative Fiscal Medicine?
BRUSSELS – Forget the fiscal cliff. The real issue is the fiscal mountain. According to the IMF, the challenge of reducing
the public debt/GDP ratio to a safe level is daunting for most
advanced countries.
In Europe, many governments, having embarked on the
path of fiscal consolidation while their economies were still
weak, are now struggling with the growth consequences. As a
result, debt stabilization seems to be an increasingly elusive target.
In the US, consolidation has barely begun. Because the private economy is now stronger, it may benefit from more auspicious growth conditions, but the magnitude of the fiscal
retrenchment needed – more than ten percentage points of
GDP, according to the IMF – is frightening. In Japan, nothing
has been done thus far and the size of the required effort defies
imagination.
All advanced-country governments are still officially committed to undergoing the pain of adjustment. But how many
will become exhausted before implementing this program in
full? Willingly or not, some may seek recourse to inflation or
administrative measures aimed at trapping domestic savings
into financing the state and keeping bond rates low (what economists call financial repression) – or, eventually, to outright
debt restructuring.
All three unorthodox remedies have been used in past debt
crises. They can be regarded as alternative forms of taxation,
albeit implicit rather than explicit. In the end, they are different
methods of forcing current and future generations to shoulder
the burden of accumulated debt.
Is it preferable to adjust in full? Or is it advisable to blend
consolidation with a dose of alternative medicine?
Here, the discussion is often couched in moral terms.
Adjustment, we are told, is morally commendable, whereas the
alternatives all amount to repudiating the contracts that
governments entered into with bondholders.
This may be true, but governments are political animals.
They care more about voters’ welfare than about moral principles. So it is worth discussing in purely economic terms what
orthodox and unorthodox choices imply from the standpoints
of equity and efficiency.
Start with equity. From this perspective, adjustment is hard
to beat. Combining taxation and spending cuts allows the bur-

den of adjustment to be distributed precisely. The decision
belongs to the legislator. Some adjustments, like in France
nowadays, weigh mostly on high-income, high-wealth individuals; others, like in Italy, weigh on pensioners. These choices
were made democratically, in parliaments, as part of budget
decisions.
The unorthodox techniques, however, are less nimble and
more opaque. Inflation affects those with assets (cash, bonds)
or incomes (wages, income from saving accounts) that are not
indexed (or are under-indexed) to prices. Financial repression is
basically a form of administrative taxation of domestic savings.

By Jean Pisani-Ferry

And restructuring is a levy on bondholders’ wealth, including
that of middle-class pension savers. On distributional grounds,
there does not seem to be a good reason to resort to them in
lieu of relying on outright taxation.
There are exceptions, though. First, governments and parliaments may be politically unable to take responsibility for distributional choices and prefer to keep them hidden. This is not a
good reason, but it does happen.
Second, restructuring concentrates the burden on those
holding bonds issued before a certain cut-off date. It thus draws
a line between the past and the future – leading to what John
Maynard Keynes called “euthanasia of the rentier.” When the
burden of past turpitude is too heavy, there may be no other
way to protect future generations.
Finally, both inflation and restructuring put some of the
burden on non-resident bondholders (through exchange-rate
depreciation and the direct reduction of the value of assets,
respectively). For taxpayers, this is a tempting formula, especially when a large share of the debt is held externally. To make
foreigners pay is, however, disputable. After all, they were not
the beneficiaries of the public goods or transfers financed by the

The Real Interest-Rate Risk
BEIJING – Since 2007, the financial crisis has pushed the
world into an era of low, if not near-zero, interest rates and
quantitative easing, as most developed countries seek to reduce
debt pressure and perpetuate fragile payment cycles. But,
despite talk of easy money as the “new normal,” there is a
strong risk that real (inflation-adjusted) interest rates will rise in
the next decade.
Total capital assets of central banks worldwide amount to
$18 trillion, or 19% of global GDP – twice the level of ten years
ago. This gives them plenty of ammunition to guide market
interest rates lower as they combat the weakest recovery since
the Great Depression. In the United States, the Federal Reserve
has lowered its benchmark interest rate ten times since August
2007, from 5.25% to a zone between zero and 0.25%, and has
reduced the discount rate 12 times (by a total of 550 basis
points since June 2006), to 0.75%. The European Central Bank
has lowered its main refinancing rate eight times, by a total of
325 basis points, to 0.75%. The Bank of Japan has twice lowered
its interest rate, which now stands at 0.1%. And the Bank of
England has cut its benchmark rate nine times, by 525 points,
to an all-time low of 0.5%.
But this vigorous attempt to reduce interest rates is
distorting capital allocation. The US, with the world’s largest
deficits and debt, is the biggest beneficiary of cheap financing.
With the persistence of Europe’s sovereign-debt crisis, safehaven effects have driven the yield of ten-year US Treasury
bonds to their lowest level in 60 years, while the ten-year swap
spread – the gap between a fixed-rate and a floating-rate
payment stream – is negative, implying a real loss for investors.
The US government is now trying to repay old debt by
borrowing more; in 2010, average annual debt creation
(including debt refinance) moved above $4 trillion, or almost
one-quarter of GDP, compared to the pre-crisis average of 8.7%
of GDP. As this figure continues to rise, investors will demand

a higher risk premium, causing debt-service costs to rise. And,
once the US economy shows signs of recovery and the Fed’s
targets of 6.5% unemployment and 2.5% annual inflation are
reached, the authorities will abandon quantitative easing and
force real interest rates higher.
Japan, too, is now facing emerging interest-rate risks, as the
proportion of public debt held by foreigners reaches a new high.
While the yield on Japan’s ten-year bond has dropped to an alltime low in the last nine years, the biggest risk, as in the US, is
a large increase in borrowing costs as investors demand higher
risk premia.

By Zhang Monan

Once Japan’s sovereign-debt market becomes unstable,
refinancing difficulties will hit domestic financial institutions,
which hold a massive volume of public debt on their balance
sheets. The result will be chain reactions similar to those seen
in Europe’s sovereign-debt crisis, with a vicious circle of
sovereign and bank debt leading to credit-rating downgrades
and a sharp increase in bond yields. Japan’s own debt crisis will
then erupt with full force.
Viewed from creditors’ perspective, the age of cheap finance
for the indebted countries is over. To some extent, the overaccumulation of US debt reflects the global perception of zero
risk. As a result, the external-surplus countries (including
China) essentially contribute to the suppression of long-term

The Political Economy of 2013
NEWPORT BEACH – Watching America’s leaders scramble
in the closing days of 2012 to avoid a “fiscal cliff” that would
plunge the economy into recession was yet another illustration of an inconvenient truth: messy politics remains a major
driver of economic developments.
In some cases during 2012, politics was a force for good:
consider Prime Minister Mario Monti’s ability to pull Italy back
from the brink of financial turmoil. But, in other cases, like
Greece, political dysfunction aggravated economic problems.
Close and defining linkages between politics and economics are likely to persist in 2013. Having said this, we should also
expect much greater segmentation in terms of impact – and
that the consequences will affect both individual countries and
the global system as a whole.
In some countries – for example, Italy, Japan, and the
United States – politics will remain the primary driver of economic-policy approaches. But elsewhere – China, Egypt,
Germany, and Greece come to mind – the reverse will be true,
with economics becoming a key determinant of political outcomes.
This duality in causation speaks to a world that will become
more heterogeneous in 2013 – and in at least two ways: it will
lack unifying political themes, and it will be subject to multispeed growth and financial dynamics that imply a range of
possible scenarios for multilateral policy interactions.
With an election looming in Italy, the country’s technocratic interim administration will return the reins of power to a
democratically elected government. The question, both for
Italy and Europe as a whole, is whether the new government
will maintain the current economic policy stance or shift to
one that is less acceptable to the country’s external partners
(particularly Germany and the European Central Bank).
Monti may or may not be involved in the new government.
The further removed from it he is, the greater the temptation
will be to alter the policy approach in response to popular pressures. This would involve less emphasis on fiscal and structural reforms, raising concerns in Berlin, Brussels, and Frankfurt.
Japan’s incoming government has already signaled an economic-policy pivot, relying on what it directly controls (fiscal

policy), together with pressure on the Bank of Japan, to relax
the monetary-policy stance, in an effort to generate faster
growth and higher inflation. In the process, officials are weakening the yen. They will also try to lower Japan’s dependence
on exports and rethink sending production facilities to lowerwage countries.
The economic impact of politics in the US, while important,
will be less dynamic: absent a more cooperative Congress, politics will mute policy responses rather than fuel greater
activism. Continued congressional polarization would maintain policy uncertainty, confound debt and deficit negotiations, and impede economic growth. From stymieing medi-

By Mohamed A. El-Erian

um-term fiscal reforms to delaying needed overhauls of the
labor and housing markets, congressional dysfunction would
keep US economic performance below its capacity; over time,
it would also eat away at potential output.
In other countries, the causal direction will run primarily
from economics to politics. In Egypt and Greece, for example,
rising poverty, high unemployment, and financial turmoil could
place governments under pressure. Popular frustration may not
wait for the ballot box. Instead, hard times could fuel civil unrest,
threatening their governments’ legitimacy, credibility, and effectiveness – and with no obvious alternatives that could ensure
rapid economic recovery and rising living standards.
In China, the credibility of the incoming leadership will
depend in large part on whether the economy can consolidate
its soft landing. Specifically, any prolonged period of sub-7%
growth could encourage opposition and dissent – not only in
the countryside, but also in urban centers.

The Unstarvable Beast
CAMBRIDGE – As the world watches the United States grapple with its fiscal future, the contours of the battle reflect larger social and philosophical divisions that are likely to play out
in various guises around the world in the coming decades.
There has been much discussion of how to cut government
spending, but too little attention has been devoted to how to
make government spending more effective. And yet, without
more creative approaches to providing government services,
their cost will continue to rise inexorably over time.
Any service-intensive industry faces the same challenges.
Back in the 1960’s, the economists William Baumol and
William Bowen wrote about the “cost disease” that plagues
these industries. The example they famously used was that of a
Mozart string quartet, which requires the same number of
musicians and instruments in modern times as it did in the
nineteenth century. Similarly, it takes about the same amount
of time for a teacher to grade a paper as it did 100 years ago.
Good plumbers cost a small fortune, because here, too, the
technology has evolved very slowly.
Why does slow productivity growth translate into high
costs? The problem is that service industries ultimately have to
compete for workers in the same national labor pool as sectors
with fast productivity growth, such as finance, manufacturing,
and information technology. Even though the pools of workers
may be somewhat segmented, there is enough overlap that it
forces service-intensive industries to pay higher wages, at least
in the long run.
The government, of course, is the consummate serviceintensive sector. Government employees include teachers,
policemen, trash collectors, and military personnel.
Modern schools look a lot more like those of 50 years ago
than do modern manufacturing plants. And, while military
innovation has been spectacular, it is still very labor-intensive.
If people want the same level of government services relative to
other things that they consume, government spending will take
up a larger and larger share of national output over time.

Indeed, not only has government spending been rising as a
share of income; so, too, has spending across many service sectors. Today, the service sector, including the government,
accounts for more than 70% of national income in most
advanced economies.
Agriculture, which in the 1800’s accounted for more than
half of national income, has shrunk to just a few percent.
Manufacturing employment, which accounted for perhaps a
third of jobs or more before World War II, has shrunk dramatically. In the US, for example, the manufacturing sector employs
less than 10% of all workers. So, even as economic conservatives demand spending cuts, there are strong forces pushing in
the other direction.

By Kenneth Rogoff

Admittedly, the problem is worse in the government sector,
where productivity growth is much slower even than in other
service industries. Whereas this might reflect the particular mix
of services that governments are asked to provide, that can
hardly be the whole story.
Surely, part of the problem is that governments use employment not just to provide services, but also to make implicit
transfers. Moreover, government agencies operate in many
areas in which they face little competition – and thus little pressure to innovate.
Why not bring greater private-sector involvement, or at least
competition, into government? Education, where the power of
modern disruptive technologies has barely been felt, would be

Property taxes and justice
It is clear that further taxation on property will only help
lay the tombstone on a sector already on a respirator.
It is not only the impact that additional taxes will have on
the number of property transactions, it is also an issue of
unjust treatment by the state towards its citizens.
For exercise purposes, let us consider three state
employees who all manage to save 1,000 euros every month.
Within five years, the first has a healthy bank account in
the region of 60,000 and plans to continue saving.
The second is a gambler and spends all his hard-earned
cash in the casino and ends up with no money to save.
The third government employee takes the 60,000 euros
he had saved, gets a bank loan for 140,000 and buys a flat as
he had been living on rent.

How does the state treat these three cases regarding taxes?
The gambler can rejoice as he’s not paying a single cent in
taxes.
Second best is the guy with the healthy savings account
as he only has to pay a small percentage for the Defense Fund
based on the interest from his savings.
Worst off is the individual who bought a flat as he is called

WHAT’S FAIR?

The fact that he took out a loan and has to pay installments
and interest does not seem to bother the authorities. Neither is
the state concerned that during the process this person paid 1%
mortgage fees and transfer fees between 3%-8% on the
purchase of the flat. Not to mention of course that if he ever
decides to sell the property the state will be getting an additional
20% capital gains tax on his profits.
Is this fair treatment? Is this how the state should be treating
its citizens?
It is quite puzzling as to what the state is aiming for? Should
we all turn gamblers or should we invest our money in real
estate helping to boost the economy and shortening the
unemployment lines?

Chinese buyers help boost Paphos, say developers
Cyprus and especially the Paphos property market
is currently being boosted by investors and property
buyers from China, according to Leptos Estates.
“There has been a nearly 50% increase in property
sales in Paphos district according to recent official
statistics and the biggest part of this increase is due
to the Chinese purchasers,” said the Leptos

announcement.
Most of the well-known Paphos developers have
attended numerous properties exhibitions in China
and the majority of their sales have been to Chinese
investors and buyers who are mostly businesses people with budgets of around 750,000 to 1 mln euros.
Paphos and the surrounding areas are attracting

property investors and tourists all year round,
because of the mild climate, the lush green areas,
the picturesque harbour, the historical and archaeological sites and above all in Paphos you have a community where locals and investors mix in this wonderful “treasure” of a place, the announcement concluded.

Digital Champ wants free WiFi
in rural areas
Stelios Himonas, the “Digital Champion” of Cyprus
promoting access to the Internet, has proposed that rural
communities get free wireless connectivity in an effort to

improve digital literacy and encourage economic growth,
and maybe even enhance investments in agriculture and
agrotourism.
Dr Himonas, Permanent Secretary at the Ministry of
Justice and former Director of the Department of
Electronic Communications at the Ministry of
Communications and Works, told members of the
Communities Union that he plans to visit most of the
rural centres within the next few months to explain his
agenda.
“My main objective will be to increase the internet
penetration in the country. To achieve this, we need to
make the people understand the benefits of the internet
and to give them the opportunity to acquire the e-skills.
Another important step is to give internet access to
everybody,” Himonas said.
He suggests setting up a new framework to implement
the plan that also includes appointing local “digital
ambassadors” who will support the project.

Germans favour cities
and expect surging prices
Seven out of every ten homes and apartments in
Germany that changed hands during the past four years
were located in major cities and their environs – up from
a ratio of six out of ten property acquisitions ten years ago.
This is the conclusion of a recent article in Die Welt,
which quoted the latest homeownership survey by TNS
Infratest. Analysts of LBS Research believe that the
increase in housing construction explains the surge in
property buying. 2012 is seen as the first year that the
number of completed new apartments – mainly in major
cities –exceeded 200,000 again.
Housing will nonetheless remain in short supply.
Demand is high then as now – and this even though
Berlin, Munich, Hamburg and Frankfurt have seen

massive price hikes lately.
A recent Forsa poll revealed that 48% of all Germans
anticipate higher real estate prices. One in five poll
respondents expects prices to decline, whereas another
22% consider it most likely that conditions will remain as
is.
According to a comparative survey by the IVD Federal
Investment and Asset Management Association, a 70-sqm
apartment in Munich in a medium-quality location will
cost 3.5 times the average annual net income. That factor
is only 1.6 times for buyers in Hanover, and about 3 for
buyers on Berlin, according to the German Real Estate
News compiled by property investment consultant Dr.
Rainer Zitelmann.

Sydney Harbour
best buy in Australian
“Monopoly”
Sydney’s Opera House and Bondi Beach are amongst some
of the iconic landmarks featuring in Australia’s first official
Sydney Monopoly board game, but Sydney Harbour scooped the
title of most exclusive property.
“It has taken a while, we apologize for that, but as soon as the
opportunity came up, we grabbed it with both hands and we
wanted to get Sydney to the Monopoly market as soon as
possible,” said Reid Herbert from the games manufacturer
Winning Moves.
Sydney Harbour now takes its place among other plum
properties, the equivalent of Boardwalk in the U.S. version and
Mayfair in the London edition.
After deciding to make the game, the company in early 2012
called for public nominations for landmarks via Facebook. From
a flood of nominations 22 places from Sydney and the greater
Sydney area were selected.
“The public resoundingly favoured our two famed harbour
properties, the Sydney Harbour Bridge and the Sydney Opera
House,” Herbert said.
Other destinations include Circular Quay, “national” surfing
beaches such as Manly and Cronulla, and Coogee Beach, a
popular swimming spot.
Additional Sydney twists include extra points for the best
float at the annual Sydney Mardi Gras, a gay pride celebration
attracting over 20,000 international visitors each year.

FinancialMirror.com

January 9 - 15, 2013

20 | WORLD MARKETS

Glimmer of home in Spanish labour data
Spain’s government enjoyed a glimmer of economic hope
when December’s employment figures were released on
Thursday showing signs of improvement. In the country’s
current financial climate these glimmers are rare, and any
government, conscious of public sentiment, would be quick
to point out the positive. Yet, how much of a positive is this
news really? Is the data more than a momentary uplift amid
Spain’s shockingly poor 2012 job figures?
For various reasons, employment in Spain has followed a
different pattern to other developed countries since the 2007
crisis. We all know that (un)employment rates are one of the
major fundamental indicators of a country’s overall financial
state. As a general rule, the more jobs, the higher the GDP,
the more people spend, and the stronger the economy. That
is why Spain’s appalling figures have raised eyebrows and led
many to question whether a recovery is even possible for the
Eurozone’s fourth largest economy.
Millions of jobs were lost following the 2008 global
financial crisis and a property market crash. The situation
deteriorated when the country slipped back into recession in
mid-2011 and the government cut public spending, reaching
a 25% unemployment level in September 2012. It exceeds
that of the US during the Great Depression!
Before the financial crisis almost 13% of Spain’s labor
force was in construction, compared to around 8% in the
Eurozone and less than 6% in the US. This industry took a
hit worldwide, since fewer people are willing to invest in
property and building when their futures are uncertain. The
impact was particularly felt by Spain given the number of

people employed in this field.
The other factor which makes Spain’s situation unique is
its huge temporary labor force. In 2007, 32% of employees
were working under a temporary contract, double the
percentage in Europe as a whole. That allowed companies in
Spain to quickly reduce staff by cutting temporary
employees, especially given that much temporary

By Oren Laurent
President, Banc De Binary

employment was in construction. The layoffs granted
Spanish firms high flexibility but also contributed to the
rapid reduction in employment.
Despite unemployment hitting a quarter of the
population, it is not all bad news. The hope is that Spain’s
labor force “flexibility” will also work well in recovery, as
firms will feel more comfortable taking on temporary staff. At
the same time, the contentious labor legislation pushed
through by Prime Minister Rajoy last February is starting to
have positive effects. His reforms have made it easier for
companies to opt out of collective wage agreements brokered
by unions and to cap severance costs on new contracts.

In practical terms, Spanish businesses are now free to hire
and fire. Workers may not be guaranteed stability, but overall,
it is likely that more will be employed. Indeed automakers,
including Ford Motor, Renault, and Peugeot are boosting
production at their plants in Spain even as they make cuts at
other factories.
So we turn back to December’s stats. The number of
people registered as unemployed fell by 1.2%, almost 60,000
people. The Economy Minister was quick to comment, “I
think 2013 will be better than 2012… The groundwork is
being laid for us to begin to see positive employment growth
rates in the fourth quarter of this year.” The Labor Minister
also jumped on the bandwagon, pointing out that this marks
the very first decline since July last year.
In credit to him, the Labor Minister did also say that it will
be vital to observe the trend in the next months and treat
December’s figures cautiously. He is right to be wary.
According to the International Monetary Fund, Spain’s
economy is likely to contract in 2013, pushing up
unemployment in the near term. I am inclined to think that
the glimmer of hope may be more fleeting than the
government would like. Yet, we have seen evidence on both
sides of the story. Employment rates
could, theoretically, go either way.
www.bbinary.com

Yen climbs vs dollar over Japan news
The yen bumped higher against the dollar and the euro on Tuesday, as investors
took profits after the Japanese unit’s recent
surge. The euro was steady against the dollar, buying $1.3124, holding well above its
three-week low of $1.2998 touched on trading platform EBS on Friday, as investors
looked ahead to this week’s European
Central Bank meeting.
“From a fundamental and technical perspective, the euro/dollar appears poised for
a stronger recovery,” Kathy Lien, managing
director at BK Asset Management told
Reuters. “Fundamentally, a reduction in
sovereign risk this year should help restore
confidence in euro zone assets and technically, $1.30 is a significant level for the currency,” she said in a research note.
With little U.S. economic data being
reported this week currency trading will
most likely be driven by the ECB’s meeting

on Thursday, comments from an array of
Federal Reserve speakers as well as sentiment in other asset classes, such as stocks.
“Euro/dollar is being driven by expectations that the Fed will maintain an easy monetary policy stance, which drives the currency pair higher,” said Sebastien Galy, FX
strategist at Societe Generale in New York.

While a majority of economists recently polled by Reuters expect the ECB
Governing Council to hold its main refinancing rate at a record low 0.75%, there
was no consensus over its next move,
reflecting a similar split among policymakers themselves.
The euro dropped 0.6% against the yen

FOREX COMMENTARY & TECHNICAL ANALYSIS
Minutes from December’s Fed meeting
released last week raised expectations that
the central bank could end its bond-buying program, called quantitative easing,
this year, but a lackluster non-farm payrolls report last Friday has some expecting
the U.S. central to maintain the status
quo.

to 114.53 yen, moving away from its 18month high of 115.995 yen set on EBS last
week.
The dollar skidded about 0.6% to 87.28
yen, moving away from Friday’s session
high of 88.48 yen on trading platform
EBS, which was its loftiest peak against
the Japanese currency since July 2010.

While many traders had said the yen
was due for a correction after its recent
slump, it remains pressured by expectations that new Prime Minister Shinzo Abe
will implement fiscal stimulus and push
the Bank of Japan to take drastic monetary
steps to pull the country out of deflation.
The new government will set up
schemes worth nearly $5 bln to boost
businesses, including helping them
buy foreign companies, according to a
draft economic stimulus package seen
by Reuters on Monday that could be
approved later this month.
The Bank of Japan next meets on
January 21-22. Japanese media reported
on Tuesday that the government and central bank were considering issuing a policy
accord that sets job stability and a 2%
inflation target as a shared goal, but might
not set a deadline for achieving the target.

Disclaimer: The commentary appearing on this page is for indication purposes only and Eurivex does not take any responsibility for investment action taken. Nothing in this report should be considered to constitute investment advice. It is not
intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. Trading on leverage is very risky and may lead to losses.

FinancialMirror.com

January 9 - 15, 2013

MARKETS | 21

A Pulse From US Manufacturing
Maybe the patient lives. 2013 has already
started to deliver early indications that we are
indeed at an inflection point in global growth.
Canada reported yesterday that its Ivey PMI
rebounded to an expansionary level of 52.8 in
December, from 47.5; respondents to
Germany’s IFO survey of business expectations (highly correlated to German exports)
has risen for two straight months. And while
less obvious, US data is also beginning to stir.
Recent headline figures on manufacturing and
employment changed little from their existing
lackluster levels, but sub-components reported
a strong pulse from the US export and manufacturing sector.
Signs of life in the US manufacturing sec-

Marcuard’s Market update
by GaveKal Research
tor are particularly gratifying to see, because a
rebound in this flagging sector is key to our
2013 outlook. The US expansion in 2012 was
almost entirely supported by domestic drivers—but this momentum could wane if the
exports and manufacturing jobs market
remain weak. The manufacturing sector now
accounts for only 10% of private payrolls in the
US, but it remains a harbinger for growth in
general. Hence, at our year-end US seminars
we suggested closely monitoring US export,

manufacturing and manufacturing employment data as critical indicators of how the US
recovery will evolve in 2013.
Fortunately, we started the year off with
good news on this front. The ISM reported
Thursday that the new export orders component of the manufacturing PMI jumped to
51.5 in December, from 47. Then on Friday,
the Department of Labor reported that manufacturing payrolls grew +25,000 in December,
the strongest growth since March.
One should never get overly excited about
one month of data, especially since the manufacturing payroll numbers are often revised
and Hurricane Sandy fluctuations may be
affecting data today. However, cautious opti-

mism is warranted given the same message of
revival in global trade and manufacturing is
apparent in the US ISM report, German IFO,
Canada Ivey PMI, the global PMI, etc.
If this first pulse proves the beginning of a
steady heart beat, 2013 could turn out to be
the first year of the recovery with both parts of
the US economy—domestic demand and
externally-driven production—driving growth
in tandem.
This means there is good reason to believe
that US GDP performance will be stronger in
2013 than in 2012, and stronger than an
extrapolation of previous GDP trends would
suggest. This eventuality would be bearish for
government bonds and bullish US risk assets.

were earth-shattering events for economists
who have spent the past 30 years training
themselves and their students to deny that
monetary policy could have any lasting effects
on unemployment or economic growth.
But the unemployment and GDP targets
suggested by Bernanke and Carney are
empty promises in the absence of policy
tools that could convincingly boost jobs and
growth in the present deflationary environment. Which is where Japan comes in. No
other economy has (yet) suffered anything
like Japan’s 20 years of economic stagnation.
It would not be surprising, therefore, if truly
radical measures to deal with deflation were
pioneered in Japan. Already, two forbidden
options have now taken center stage in
Japan: ending central bank independence
and then ordering the BoJ to print money for
infrastructure spending or tax cuts. These
truly radical policies, which amount to handing out newly created money to businesses
and households, are sometimes described as
“helicopter money” or quantitative easing for
the people. Using quantitative easing for
direct financing of cash payments or tax
rebates for the general public—instead of
indirect subsidies to governments and bond
investors—may sound wildly irresponsible.
But it would arguably be fairer and certainly
more effective (as well as more popular) as a
way of pulling the world out of deflation.
By breaking the taboos established by the
monetarist revolution of the 1970s, Japan
could accelerate and reinforce the next revolution in economic thinking, a revolution
made inevitable by the events of 2008. After

20 years of Japanese torpor, could the world
be transformed again by ideas “Made in
Japan”?

Japan Shakes The World?
The themes that obsessed financial markets in 2012 emanated from the US, Europe
and China, and they were all largely negative.
Now that the US fiscal cliff and a euro breakup
have been averted, and China’s economy
again proved it was not a massive investment
bubble on the brink of implosion, attention
should turn elsewhere. In 2013, Japan—
where politics and monetary policy have suddenly got exciting—could prove to be a major
story.
Last month’s election landslide for Shinzo
Abe, a potentially powerful prime minister,
was partly at least a result of his promise to
revolutionize monetary policy with the aim of
jolting the Japanese economy out of its 20year stupor. At a practical level, Abe has promised to force the Bank of Japan to print money
and weaken the yen until the inflation rate
accelerates to 2% and growth is restored. If he
acts seriously on his election rhetoric, Japan’s
global competitiveness will get a boost, but
the effect will also likely strengthen the dollar,
not only against the yen but also against the
euro and other major currencies.
Less obvious, but even more important,
could be Japan’s impact on the global debate
about macroeconomic management. The era
when monetary policy was simply about controlling inflation is over. A number of leading
central banks have already shifted towards
nominal GDP growth targeting, but Japan is
the country most likely to lead the charge—
possibly by using printed money directly to
finance investment and even private consumption.
The new ideas in monetary policy reflect

the changing interaction of economic theory
with politics. A singular focus on inflation
made political sense in the late 1970s and
early 1980s, when rapidly rising prices were
the biggest economic problem in most countries. Politicians realized that the only sure
way to stop inflation was to create previously
unthinkable levels of unemployment by
relentlessly raising interest rates. Since
nobody wanted to take political responsibility
for firing workers, economists had strong
incentives to come up with theories that
proved unemployment was natural and
inevitable, that macroeconomic policy could
do nothing about it and that the sole effect of
monetary policy was on inflation.
A natural and convenient corollary was to
absolve governments of responsibility for
monetary management and shift this to politically independent central banks. It was not
long before economists unanimously
embraced these three key policy implications
of the 1980s monetarist revolution. Any economist or political analyst who suggested anything different—for example, that politicians
should coordinate monetary and fiscal policy
to manage unemployment, as well as inflation
—was laughed out of university economics
departments, as well as finance ministries and
central banks. This purge is now over.
Centrals bankers have broken the taboo
against acknowledging any responsibility for
unemployment. Ben Bernanke has committed the Fed to a 6.5% unemployment target
and Mark Carney, the incoming governor of
the Bank of England, has proposed targeting
the growth of gross domestic product. These

Disclaimer: This information may not be construed as advice and in particular not as investment, legal or
tax advice. Depending on your particular circumstances you must obtain advice from your respective professional advisors. Investment involves risk. The value of investments may go down as well as up. Past performance is no guarantee for future performance. Investments in foreign currencies are subject to exchange
rate fluctuations. Marcuard Cyprus Ltd is regulated by the Cyprus Securities and Exchange Commission
(CySec) under License no. 131/11.

The yen and dollar face a tough 2013 as the
Japanese and U.S. central banks print money
furiously to stimulate their economies, making the euro and sterling unlikely relative winners despite Europe’s gloomy prospects.
With a global economic recovery looking
shaky, analysts say the major central banks will
be happy to see their currencies weaken this
year if it helps their exporters to become more
internationally competitive.
This could trigger a round of competitive
devaluations among the world’s most heavilytraded currencies, with Japan a likely winner in
this race for weakness as its new government
tries to end decades of regular recessions and
deflation.
Currency forecasting is notoriously difficult
and movements often seem at first to lack
logic. For instance the euro rose 1.8% against
the dollar in 2012 despite the threat of a euro
zone break-up, although the gains followed a
European Central Bank promise to safeguard
the currency union.
Undaunted, analysts expect the yen to be
the worst performer, while the dollar may lag
the euro and the pound even though the
United States is likely to outperform the euro
zone and British economies in 2013.
This is because the U.S. Federal Reserve
plans to flood markets with a trillion dollars in
stimulus this year by buying mortgage and
government bonds, pushing down the value of
the U.S. currency. Similarly, the Bank of Japan
is preparing to pump trillions of yen into its
stagnant economy.
Their actions should outstrip any similar
move by the Bank of England, which has
paused its printing presses, or the ECB. In the
foreign exchange market, where a currency is
always valued relative to another, a fall in the
dollar or yen will push the euro and sterling
higher.
“Major central banks printing more money
and debasing the most liquid currencies is a
major theme that will play out in the currency
market this year,” said Tom Levinson, FX
strategist at ING, referring to the Fed and BOJ.
Some investors will not necessarily trade
one major currency for another and instead
opt for the likes of the Australian dollar. “What
this liquidity injection will spark is a push
towards less liquid and more risky currencies,”
Levinson added.

Flooding markets with dollars and yen will
help to gloss over any weakness in the euro
and the pound caused by the struggling
economies of Europe.
“Central bank action, especially that of the
Fed and the BOJ will help paint over cracks in
the macroeconomic picture, both in the euro
zone and UK,” said Jane Fol
ey, senior currency strategist at Rabobank.
“Currencies will not move in a straight line.
But we expect the euro to rise against the dollar to $1.35 in the medium term. The dollar
will generally have a poor year, as will the yen.”
The euro is trading now around $1.3050,
having gained rapidly after the ECB conditionally promised in the late summer to buy bonds
of struggling euro zone countries, should their
governments seek international aid.
Since then, no government has requested a
bailout and Spain says it does not need help at
the moment. However, should the ECB start
buying bonds, its programme would differ significantly from those of the Fed or BOJ. Its
objective would be to help governments continue borrowing commercially at affordable
interest rates, rather than stimulating the euro
zone economy.
With Germany wary of anything that might
be inflationary, ECB policymakers have promised not to crank up the euro printing presses.
Any money spent on bonds would be “sterilised”, meaning the ECB would withdraw
equivalent sums from the banking system.
Early signs of the trends forecast for this
year are already apparent. The euro rose 15%
against the yen in 2012, hitting a 1-1/2 year
high this week.
The pound stands at multi-month highs
against the dollar and yen, mainly because of
the dollar and yen weakness and not because
of a British economic turnaround, traders said.

CARRY TRADES

The Fed has already made heavy asset purchases which have expanded its balance sheet.
Some Fed policymakers have expressed concern about the long-term risks of this, even
though they look set to continue the openended stimulus programme for the moment.
John Normand, head of global FX strategy
at JPMorgan, said the Fed and BOJ actions
would boost the balance sheets of major central banks by about 10% this year, on a par

with the pace seen in 2012 when both the yen
and the dollar lagged the euro and sterling.
The large cash injections have prevented a
sharp contraction in economic activity and
restricted swings in foreign exchange markets, making it harder for investors to make
money in the most traded currencies.
That has driven many to take bigger positions in the less liquid and riskier currencies
and Normand said the flood of liquidity in
2013 will ensure investors keep using “carry
trades” in the search for higher returns.
In carry trades, investors such as hedge
funds borrow money in the more liquid and
low interest-bearing dollar and yen to buy
higher-yielding currencies like the Australian
dollar .
Reflecting the expected slide in the yen, it
will emerge as the favourite funding currency
in 2013, analysts said.
“We would expect the yen’s use as a funding currency to broaden in the coming year,”
Morgan Stanley said in a recent report, forecasting the dollar to rise to 90 yen in the
coming months from around 88 yen on
Friday.

DOLLAR WEAKNESS

While the yen and the dollar are likely to
struggle, any glimmer of recovery in the euro

zone and Britain - where investors have
priced in expectations of a prolonged slowdown - could give both the euro and the
British pound a fillip.
BNP Paribas strategists expect sterling to
outperform the euro and the dollar. The bank
expects the euro to drop to 80 pence in a few
weeks, from around 81.20 now, and forecasts
sterling at $1.68 in coming months, from
$1.60, once global recovery gathers pace and
UK exports pick up.
While the euro may lag the pound it could
rise against the dollar, drawing support from
the ECB’s promise to do whatever it takes to
preserve the euro and the fact that the Fed
will be pumping in more dollars.
“What looks absolutely assured is that in
the first half of 2013, the Fed’s balance sheet
will expand significantly more than the ECB
assets,” said Alan Ruskin, macro strategist at
Deutsche Bank, adding this was likely to lead
to a lower dollar.
Ruskin expects the ECB’s balance sheet to
shrink slightly by 100 bln euros until it starts
any bond purchases.
“While uncertainties remain in the euro
zone, as well as a weak growth outlook, we
view the euro is likely to remain supported
and reach $1.35 by end-Q1,” BNP Paribas
said.

Spanish unions brace for more bank job cuts
Spanish banking unions are braced for
thousands more job cuts this year, starting
with redundancies at Spain’s largest bank
Santander after its merger with subsidiary
Banesto.
Unions said on Friday they expect between
3,000 and 4,000 jobs to go as a result of the
merger and would hold talks next week with
the bank.
With 6,000 jobs also going at Bankia and
thousands of redundancies at other nationalised banks, the year has started on a gloomy
note for many workers in Spain where around
one in four of the workforce is already jobless.
In the financial sector alone, banking
unions estimate 12,000 job losses this year, on
top of about 35,000 cuts since the middle of

2008 when Spain’s property crisis began to
grip the industry.
Spain has received 40 bln euros in
European aid to restore its financial system,
but as a condition of the aid - much of which
will go to nationalised lenders including
Bankia - troubled lenders must cut more jobs
and sell assets.
Santander last month announced plans to
fully absorb its 110 year-old Banesto brand,
closing 700 branches to cut costs and help
position itself for any further downturn in
Spain’s sickly banking sector.
The bank had warned of job losses stemming from the branch closures after the
Banesto tie-up but said they would be implemented gradually.

FINAL FIGURE

“We’ll start to talk about the cuts with
Santander this week. The bank hasn’t confirmed any numbers, but we think the final figure will be closer to 3,000,” said Jose Miguel
Villa, secretary general of the services federation for Spain’s second-largest union UGT.
A Santander spokeswoman said the bank
will meet with unions on January 9 but would
not give any further details such as on the
scale or timing of any reductions.
Santander has said that the job cuts would
be made through early retirements, incentivized departures and transfers to other units
of the group.
The bank was one of the best performers on
Spain’s blue chip index last year, rising from

around 5.26 euros at the end of 2011 to close
the year at just over 6 euros thanks to its handling of the financial crisis.Almost every day
brings fresh unemployment news in Spain,
where on average 2,000 jobs were lost a day
last year, a number that many analysts expect
to rise in 2013 as struggling companies cut
staff in a weak economy.
“This is going to be a tough year,” Villa of
UGT said. Unions will also begin talks with
state-owned Bankia on January 9 over previously announced plans to lay off 6,000 of its
20,000-strong workforce, Villa said.
In other sectors, Spanish airline Iberia is
negotiating 4,500 job cuts - a quarter of its
workforce - with unions as part of a wider
restructuring it says is necessary for its survival.

FinancialMirror.com

January 9 - 15, 2013

WORLD MARKETS | 23

Forex managed accounts vs. social trading networks
Beware of Super Performance promises – Part 2
In our previous article we discussed the regulatory differences between forex portfolio management firms and the
unregulated social trading networks, but in this issue we
shall cover how unregulated signal providers promise spectacular high returns, which at most times never materialize
when the actual trading begins.
Social trading network is the process when an investor
connects his account to the trading signals generated by
either a trader or a computer application also known as
Expert Advisors (EA), whereby when the signal provider
issues a buy/sell signal on his demo/real account, the trading
account of the investor mirrors or replicates the trade with an
inconstant slippage.

By Shavasb Bohdjalian
Certified Investment Advisor
and CEO of Eurivex Ltd.
The most popular social trading network providers are
Zulutrade, Tradeo, Ayondo and Currensee to name a few,
with more such networks springing up at a record pace, lured
by the spread markup that the social trading network negotiates with the forex brokerage where the trading is made.

HIGH RETURN

If you visit any of the social trading networks (STNs) the
first thing that you notice is the spectacular returns that the
signal providers are achieving and the amount of money and
the number of investors that are following the particular signal provider.
I visited one popular STN and noticed that about 5,000
people were following a particular signal provider who was
claiming a spectacular 400% return, while the second runner
up had 1,100 followers with near 175% return.

OPEN VS. CLOSED POSITIONS

The first thing you should check in order to be sure that
the performance returns are anywhere near reality is to verify if all positions have been closed and marked-to-market.
Since the STNs are operating in a totally unregulated environment there is no rule on what is the correct marketing
behaviour.
So, the most effective way through which signal providers
“achieve” super performance is to close only the profitable
positions whilst leaving the loss-making positions open. This

way they are “successful” on almost every
trading month and hence their performance
is so good. But in reality if one would also take
into consideration their unrealised loss-making open positions, the performance returns
would disappear immediately, and in most
cases the “follower” would incur losses on
their trading account, eventually wiping out
their capital.

DRAWDOWN

Another important consideration is how
much is the drawdown and how much losses
were accumulated on a particular trade before
it was eventually closed.
Drawdown is the maximum tolerable
cumulative drop in capital in a given time
period, due to consecutive losing trades.
Drawdown has to be contained and minimised as much as possible. For example, if
the signal provider has recorded a 50% drawdown, you might believe that the worst could
be that you would lose 50% of your invested capital.
However, in real terms that drawdown of 50% could count
for 5,000 pip loss, which could take your account to 0.
Alternatively, if the signal provider makes 10-25 pips on
successful trades but allows 800 pips losses on open positions, then you can realize that in actual market conditions,
before you know it, the service provider will be making multiple margin calls on the investor to inject new capital to support the open loss-making positions and if such money is not
provided on demand, then the positions will be force-closed
and the account relationship terminated.

SLIPPAGE

The issue of slippage is also particularly important since
this is when the signal provider usually claims to have exited
from a different situation whereas the investor is usually
stuck in a loss-making situation. Slippage is when the brokerage or service provider deliberately delays providing a
price or does not execute the trade at a particular price and
forces the investor to close a position at a more disadvantageous price. Market makers who make their own prices usually promise very low spread but apply slippage citing market
volatility.
In sharp contrast to the STNs and how signal providers
operate, the regulated portfolio managers operate under
strict supervision and oversight, meaning their performance

takes into account all open or closed positions since all
accounts are marked-to-market on a 24-hour basis, the drawdown and maximum losses are strictly controlled and the
account operates according to the specific client needs and
the portfolio manager usually trades with firms who provide
a decent service and avoid service providers who make their
own prices and use excessive slippage as another way to
make money.
So, next time you see spectacular returns, you know
where to start looking for the clues on whether or not the signal provider is real or bogus.
www.eurivex.com,
shavasb@eurivex.com
(Eurivex Ltd. is a Cyprus Investment Firm, authorized and
regulated by CySEC, license #114/10 with expertise in managed forex accounts. The views expressed above are personal
and do not bind the company and are subject to change without notice. The comments mentioned above are not to be considered as an offer to subscribe, invest or benefit from an
investment scheme, nor are to be considered as advice for trading in markets. The comments are for information purposes
only and are general in nature. The examples will vary and
depend on individual circumstances. Trading on margin and
leverage is risky and may result in losses. Past performance is
no guarantee for future performance.)

Carbon market worth plunged 30% in 2012
The value of the world’s carbon market fell by 36% last
year, according to Bloomberg New Energy Finance, the first
annual contraction to hit the CO2 reduction mechanism
since 2008.
The worth of traded EU carbon allowances and UN
emissions credits fell from 95 bln euros in 2011 to 61 bln.
Analysts blame a near halving of the average price of
carbon allowances from 11.2 euros a tonne in 2011 to 6.4
euros a tonne by the end of 2012.
“This analysis doesn’t come as a surprise, as we all
know the reality of the market,” Sarah Deblock, the EU
policy director of the International Emissions Trading
Association (IETA) told EurActiv.
“It reaffirms the importance of the proposal by the
European Commission to backload 900 mln allowances
during phase III of the EU ETS,” she said.
The EU executive has proposed staggering the release of
these allowances to create a temporary scarcity to slightly
raise carbon allowance prices, which have been depressed
by economic recession and a lack of robust political signals.
However, the measure’s success may depend on
Brussels’ ability to maintain ambiguity about the
possibility of the credits being permanently removed,
although the far-sightedness of market traders is
considered a moot point.
One silver lining in the Bloomberg numbers for market

traders may be a 26% leap in the total trading volume of
carbon allowances to 10.7 bln metric tonnes, equivalent to
a third of the world’s total CO2 emissions.

BACKLOADING PROPOSAL

Much of this may be down to speculation which
surrounded the EU’s plans for intervention in its Emissions
Trading System (ETS). The final backloading proposal
from the European Commission is still awaiting approval
from the EU’s Parliament and member states
representatives in the Council of Ministers.
Guy Turner, Bloomberg New Energy Finance’s director
of carbon markets said that the drop in the carbon market’s
value was significant primarily as a temporary response to
the recession.
“Any market will go through ups and downs,” he told
EurActiv over the phone from London. “Given that the
market has only been in existence since 2008 and hasn’t
suffered a down year in terms of market size, I think it rode
the global financial crisis pretty well.”
Bloomberg New Energy Finance predicts that in 2013,
market value will increase to around 80 bln because of the
EU’s backloading measures, and that in 2014 it will be
worth a record ?94 bln.
“What matters is how much demand there is [for
allowances] today,” Turner said. “That’s what determines

short term prices, so we think that the backloading will
support prices in the short term, unequivocally.”
New market entrants
The cap and trade idea, which began in the US, will soon
be buoyed by the entrance of a pack of countries and
regions to the global trading floor.
In 2015, Australia and South Korea are due to open
carbon markets, while China is beginning its own project
this year and California, a US state one eighth the size of
Europe, launched its first carbon allowances auction on
November 14, 2012.
Australia’s carbon price has been fixed at 18 euros a
tonne until 2018, when it will merge with the EU’s ETS.
“California will be interesting,” Turner said. “I think
you’re going to see the highest prices in the world in
California, and although the schemes in Australia, South
Korea and China aren’t actually trading yet, they are
positive developments.”
China is expected to launch several regional pilot carbon
trading schemes this year, initially using a nominal price
for CO2, and these could also have a knock-on effect on
world markets.
“We are eagerly anticipating the World Bank’s State
and Trends report for 2013, which will be released at
Carbon Expo in Barcelona at the end of May this year,”
Deblock said.

A move by global regulators to give banks more time and
flexibility to build up cash reserves will do little to support a
recovery in Europe, where recession-hit companies and households have scant appetite for more debt.
In the United States, where economic recovery already
appears to be underway, the impact may be more significant
due to a bigger market for mortgage-backed securities which, if
revived, could lend support to the housing market.
The Basel Committee agreed on Sunday to give banks four
more years to build up cash buffers against future shocks like
the 2008/09 financial crisis, and to widen the range of assets
they can use to include shares and residential mortgage-backed
securities, as well as lower-rated company bonds.
This pull-back from an earlier draft of global liquidity rules,
which aim to help prevent another banking crisis, means
lenders will in theory have more scope to use some of their
reserves to help struggling economies grow.
But in the euro zone, where the European Central Bank’s
own forecasts suggest the economy will shrink 0.3% this year,
freeing up banks’ capacity to lend cannot make up for a dearth
of demand from uncertain businesses and consumers.
“Overall it is positive, but I don’t think it is enough to turn
around the whole situation in the short-run,” Berenberg Bank
economist Christian Schulz said of the Basel rules change.
“Once the (economic) rebound actually starts, I think this is
going to amplify it a little,” added Schulz, who put the effect on
growth in the 17-country euro zone at no more than 0.1-0.2
percentage points of annual GDP.
A spokeswoman for Raiffeisen Bank International said: “This
is a positive signal by the Basel Committee.” However, she
stopped short of saying it would fuel extra lending.
Bank Austria, the UniCredit unit that is emerging Europe’s
biggest lender, said the changes “will make it easier in future to
lend to companies than the originally planned rules did”.

UNCERTAIN OUTLOOK

The regulators’ change of tack at least offers the prospect of
supporting lending to households and businesses - an area
where the ECB has struggled to have an impact.
The ECB channelled more than 1 trln euros in cheap, 3-year
loans to banks in late 2011 and early 2012. The central bank
says this averted a major credit crunch but demand remains the
real problem.
“To a large extent, subdued loan dynamics reflect the weak
outlook for GDP, heightened risk aversion and the ongoing
adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand,” ECB President Mario
Draghi said in his statement after the bank’s December policy
meeting.
The ECB’s last quarterly Bank Lending Survey showed that
euro zone banks made it harder for firms to borrow in the third
quarter and expected to toughen loan requirements further,
even though their own funding constraints eased.
By far the most important reason banks cited for tightening
credit standards for firms was the economic outlook. Reduced
investments were the main reason for lower corporate loans
demand.
The picture was similar for household loans, with the economic outlook cited as the main reason for tightening credit
standards, followed by housing market prospects.
Howard Archer, economist at Global Insight, saw little effect
on Europe’s economy from the looser bank buffer rules.
“This may increase banks’ ability to lend but whether their
willingness to lend increases that much, I am dubious because
of the economic environment,” he said. “At the same time, I
think demand for credit will remain pretty muted overall as well.”

U.S., INVESTOR OPPORTUNITIES

The decision to include residential mortgage-backed secu-

rities in the assets banks can put into the cash buffer - even
if at a hefty discount to their value - should help banks in the
United States and stimulate the U.S. securitisation market.
“This should, at the margin, favour U.S. banks relative to
European banks, because the use of these assets is much less
common in most European countries than it is in the United
States,” said Tobias Blattner, economist at Daiwa Europe.
Any fresh support to the U.S. economy - where employers
added 155,000 jobs last month and factory activity rebounded - could help it to accelerate further away from Europe.
The United States, China and much of the developing
world have already decoupled from Europe, leaving it to wallow in various stages of recession and fiscal disarray.
From an investor point of view, the cash buffer changes
could increase the attractiveness of the bank debt, assetbacked securities and other types of assets now included in
the rules.
Under the original draft, emphasis was almost exclusively
on holding sovereign debt but the changes mean some corporate debt rated as low as BBB-, a range of easy-to-sell
shares and double-A rated residential mortgage-backed securities can also be used.
There are other restricting factors. Deductions, known as
haircuts, will be taken from the assets’ value to ensure they
provide adequate protection even if their value drops.
Combined they will be allowed to account for only 15% of
what a bank must hold.
With a broader menu of assets now available, analysts said
the rules changes could ease demand for sovereign bonds.
“From a big picture perspective, these revisions are potentially negative for sovereign debt in so much as they reduce
banks’ imperative to hold government bonds,” said analysts
at Rabobank, adding that the changes could boost demand
for corporate debt.

Debenhams posts record Christmas sales
Debenhams, Britain’s No. 2 department
store group, posted record Christmas sales,
driven by a jump in online trade and a stepup in promotions.
The group said sales at stores open over a
year, rose 5.0% in the five weeks to January 5,
with like-for-like sales in the 18 weeks to
January 5 - a big chunk of the firm’s fiscal
first half - up 2.9%.
That compares to analysts’ consensus
forecast for the first half to end-February of
an increase of 2%.
The growth was boosted by strong demand
online, with sales over the 18 weeks up 39%,
ahead of the firm’s expectations.
However it also had to rely on promotions
to draw in the customers. Debenhams said
the overall market had seen more promotions than the prior
year which resulted in some increase in its own promotional
activity in the run-up to Christmas.
As a result, it now expects gross margin for the 2012-13
year to be ten basis points higher than last year rather than
20 basis points previously guided.
“We continue to believe that whilst consumers have
become acclimatised to the new economic reality, we don’t
anticipate a significant change in consumer confidence in
the remainder of the year,” said Chief Executive Michael
Sharp.
Many store groups are finding the going tough as
consumers fret over job security and a squeeze on incomes.
Debenhams has generally bucked the gloomy trend,
helped by its breadth of products, appeal to a wide range of
customers, multiple routes to market and well received
marketing campaign.
The firm’s variety of product categories, with a core
clothing offer supplemented by accessories, homewares and
health and beauty, means it is also less exposed than other

retailers to the vagaries of Britain’s weather.
Separately on Tuesday an industry survey said British

retail sales rose 0.3% in December. With
annual consumer price inflation
currently running at 2.7%, this suggests
that stores sold less in real terms,
increasing the chance that Britain’s
economy slipped back into contraction
in the last three months of 2012.
Last week, No. 2 clothing retailer Next
reported a 3.9% rise in total sales for the
eight weeks to December 24 and raised
its year profit guidance. However,
clothing market leader Marks & Spencer
is forecast to report a further decline in
general merchandise sales when it
updates on its third quarter on
Thursday.
Shares in Debenhams, which have
doubled over the last year, closed Monday at 117 pence,
valuing the business at 1.47 bln pounds.

How UK retailers fared
over Christmas
With British shoppers fretting over job security and
a squeeze on incomes, retailers found the going tough
in 2012. Following is a summary of how they fared
over Christmas:
JOHN LEWIS
Sales up 14.8% in 5 weeks to Dec. 29.
HOUSE OF FRASER
Like-for-like sales, ex VAT, up 6.3% in 6 weeks to Jan. 5.

Ignores weighted number of shares in circulation
Forecasted profits are liable to change without notice and responsibility

No. of warrants
(000)
24831
17606

Mkt Cap
(00)
25
176
224

CSE Code No. of Bonds

(N.E.A.)
GreenTea SA

GRTEA

1 040

Exercise Period

Exercise Price
euro cents

Expiry Date

20-30 Jun 2001-2015
1-15 May & 1-15 Nov 07-13

173
20c or EUR 35c

30-06-2005
15-11-2013

Latest
Close
0.001
0.010

Market Cap

Latest price

Listing

Latest

EUR

EUR

Date

NAV

104 000 000

100 000

8 Nov 2011

N/A

Disclaimer: The commentary appearing on this page is for indication purposes only and Eurivex does not take any responsibility for investment action taken. Nothing in this report should be considered to constitute investment advice. It is not
intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. Trading on leverage is very risky and may lead to losses.

January 9 - 15, 2013

FinancialMirror.com

28 | BACK PAGE

‘Cliff’ concerns give way to earnings focus
WALL ST WEEKAHEAD
Investors’ “fiscal cliff” worries are likely to give way to
more fundamental concerns, such as earnings, as fourthquarter reports get under way this week.
Financial results, which begin after the market closes
on Tuesday with aluminum company Alcoa, are expected
to be only slightly better than the third-quarter’s lackluster
results. As a warning sign, analysts’ current estimates are
down sharply from what they were in October.
That could set stocks up for more volatility following a
week of sharp gains that put the Standard & Poor’s 500
index on Friday at the highest close since December 31,
2007. The index also registered its biggest weekly percentage gain in more than a year.
Based on a Reuters analysis, Europe ranks among the
chief concerns cited by companies that warned on fourthquarter results. Uncertainty about the region and its weak
economic outlook were cited by more than half of the 25
largest S&P 500 companies that issued warnings.
In the most recent earnings conference calls, macroeconomic worries were cited by ten companies while the U.S.
“fiscal cliff” was cited by at least nine as reasons for their
earnings warnings.
“The number of things that could go wrong isn’t so
high, but the magnitude of how wrong they could go is
what’s worrisome,” said Kurt Winters, senior portfolio
manager for Whitebox Mutual Funds in Minneapolis.
Negative-to-positive guidance by S&P 500 companies
for the fourth quarter was 3.6 to 1, the second-worst since

the third quarter of 2001, according to Thomson Reuters
data.
U.S. lawmakers narrowly averted the “fiscal cliff” by
coming to a last-minute agreement on a bill to avoid steep
tax increases last week - driving the rally in stocks - but the
battle over additional spending cuts is expected to resume
in two months.
Investors also have seen a revival of worries about
Europe’s sovereign debt problems, with Moody’s in
November downgrading France’s credit rating and debt
crises looming for Spain and other countries.
“You have a recession in Europe as a base case. Europe
is still the biggest trading partner with a lot of U.S. companies, and it’s still a big chunk of global capital spending,”
said Adam Parker, chief U.S. equity strategist at Morgan
Stanley in New York.
Among companies citing worries about Europe was
eBay , whose chief financial officer, Bob Swan, spoke of
“macro pressures from Europe” on the company’s October
earnings conference call.

REVENUE WORRIES
One of the biggest worries voiced about earnings has
been whether companies will be able to continue to boost

profit growth despite relatively weak
revenue growth.
S&P 500 revenue fell 0.8% in the
third quarter for the first decline since
the third quarter of 2009, Thomson
Reuters data showed. Earnings growth
for the quarter was a paltry 0.1% after
briefly dipping into negative territory.
On top of that, just 40% of S&P 500 companies beat
revenue expectations in the third quarter, while 64.2% beat
earnings estimates, the Thomson Reuters data showed.
For the fourth quarter, estimates are slightly better but
are well off estimates from just a few months earlier. S&P
500 earnings are expected to have risen 2.8% while revenue is expected to have gone up 1.9%.
In October, earnings growth for the fourth quarter was
forecast up 9.9%.
In spite of the cautious outlooks, some analysts still see
a good chance for earnings beats this reporting period.
“The thinking is you need top-line growth for earnings
to continue to expand, and we’ve seen the market defy
that,” said Mike Jackson, founder of Denver-based investment firm T3 Equity Labs.
Based on his analysis, energy, industrials and consumer
discretionary are the S&P sectors most likely to beat earnings expectations in the upcoming season, while consumer
staples, materials and utilities are the least likely to beat,
Jackson said.
Sounding a positive note on Friday, drugmaker Eli Lilly
and Co said it expects profit in 2013 to increase more than
Wall Street had been forecasting, primarily due to cost controls and improved productivity.